The 2008 Bitcoin Whitepaper painted a vision of a peer-to-peer electronic cash system without the need for a trusted third party. Payments were one of the first promises made by digital currency and blockchain technology, and it was Satoshi Nakamoto’s solution to a failing financial system at the time, a blockchain solution.

Despite billions of dollars invested in developing blockchain infrastructure over the past decade, and the emergence of high performance blockchains such as Solana along with the explosive rise of stablecoins, most of today’s infrastructure is still built around the trading of digital assets. There hasn’t been a focus on supporting real-time payments at scale, hindering the widespread adoption of blockchain-based payments.

So, what kind of infrastructure do we need to support real-world payment scenarios? What is the value and significance of PayFi?

In this article, we had the privilege to engage in a deep conversation with Raymond, co-founder of PolyFlow, a decentralized PayFi infrastructure. More than just a conversation, it was an opportunity to understand and learn from someone with over two decades of international financial consulting experience, and to grasp his comprehensive insights into digital finance from a global perspective, as well as his profound understanding of blockchain technology.

Raymond has unique visions for innovative financial services in the international markets. Under his leadership, Geoswift became a comprehensive global financial service company covering international payments, cross-border remittances, foreign exchange, and prepaid card services. He is also a prominent investor in the global digital finance space, with investments in companies like Ripple, Airwallex, and other leading firms in fintech, AI, Web3, blockchain, and digital banking. Additionally, Raymond serves as a senior advisor to the National Bank of Canada and is a member of the expert panel of the Financial Research Institute at China’s State Council Development Research Center.

I. The Genesis of PolyFlow

PolyFlow is the first PayFi infrastructure linking RWA with DeFi. By integrating traditional payments, blockchain-based payments, and DeFi, PolyFlow provides essential PayFi infrastructure to ensure compliance, security, and seamless integration of Real World Assets. PolyFlow aims to further promote efficiency and the freedom of value movement, thus driving the establishment of a new financial paradigm and industry standard.

Before discussing PolyFlow in detail, Raymond first explained the nature of financial transactions to help us better understand the true value of PolyFlow.

The Core of Financial Transactions

In traditional financial markets, any financial transaction and transfer of value involve two essential components: information flow and fund flow, both of which form the foundation of financial transactions.

Information Flow: Refers to the data in the transaction process, including transaction initiation, payment, and settlement instructions. It ensures the accuracy and timeliness of the transaction, focusing on the transmission of transaction commands and data.
Fund Flow: Refers to the actual transfer of funds between parties during a transaction, focusing on the movement of capital.

In financial transactions, information flow and fund flow are inseparable. Their effective combination ensures the secure and efficient completion of financial transactions.

Information and Fund Flow in a Cross-Border Context

Due to differences in language, currency, and regulations, the pathways for information flow and fund flow in cross-border transactions vary significantly.

For example, the well-known SWIFT system focuses solely on the transmission of information, not fund flow. SWIFT standardizes message formats, building a highly uniform and automated global financial messaging network that enables banks worldwide to quickly and accurately exchange financial transaction data.

Although information flow can be fully conducted via SWIFT, fund flow is constrained by foreign exchange controls, regulatory compliance, and anti-money laundering (AML) regulations in different jurisdictions. As a result, fund flow cannot synchronize with information flow in real time.

What further hinders global value movement is that even possessing a SWIFT code does not necessarily qualify you to participate in this network.

Facilitating Value Flow through PolyFlow

This is where PolyFlow comes in: creating a decentralized infrastructure that allows more participants to build a global payment network, reducing regulatory compliance burdens, eliminating custodial risks, and minimizing third-party involvement.

PolyFlow’s core philosophy is based on modular designs, effectively decoupling the information flow and fund flow previously controlled by centralized institutions. By doing so in a decentralized manner, PolyFlow ensures that transaction processes better align with regulatory compliance standards, mitigates custodial risks, and leverages blockchain technology to connect the DeFi ecosystem, accelerating the mass adoption of PayFi applications.

PolyFlow introduces two key components: Payment ID (PID) and Payment Liquidity Pool (PLP):

PID handles the information flow and serves as a powerful tool for user identity verification, regulatory compliance, privacy protection, data sovereignty, AI data processing, and “X to Earn” functionalities.
PLP handles the fund flow. PLP manages funds within smart contracts for payment transactions. It ensures secure and compliant handling of digital asset circulation, custody, and issuance. PLP not only provides a framework for traditional payments but also introduces composability and scalability to DeFi ecosystems.

Together, PolyFlow creates a regulatory-compliant, custodial-risk-free, DeFi-compatible business architecture and a secure and compliant framework for the circulation, custody, and issuance of digital assets.

II. PID: Bridging the Physical World and Digital Wallets

PolyFlow’s Payment ID (PID) is a decentralized ID built to manage the transaction information flow. It can be bound to encrypted KYC/KYB data for user privacy protection, and it can link to verifiable credentials (VCs) across multiple platforms, achieving:

Regulatory Compliance: PID can incorporate validation information across different platforms, simplifying the verification process for partners.
Privacy Protection: Using technologies like zero-knowledge proofs, PID ensures compliance with AML/CTF obligations without exposing user privacy. This is a prerequisite for users engaging in both traditional finance and DeFi ecosystems.
Data Sovereignty: PID allows the flow of funds to be reported to regulators to meet compliance requirements, while at the same time returning on-chain behavioral data to users.
AI-Powered: Besides the KYC/KYB data, PID can also link transaction data uploaded off chain or collected on chain. AI can then help analyze the wealth of daily transaction data and extract additional value for its PID owner. This also plays a crucial role in building an on chain credit system.

The introduction of PID provides transformative advantages for PolyFlow as the foundation of PayFi infrastructure. It builds a bridge between traditional finance and DeFi ecosystems, offering users a flexible and reliable way to manage digital identities, engage in cross-platform transactions, and establish on-chain credit.

So how exactly should we look at PID’s purpose of linking the physical world to a digital currency wallet?

As Raymond explains, “A PID is not necessarily the same as an ID for payments, but more like a wallet that we carry around. Imagine the wallet in our pocket that contains not only cash. It also might hold a family photo (NFT), a bank card (wallet address), an ID (user ZK-enabled information extraction, data privacy protection), and so on. Therefore, from this perspective, wallets don’t necessarily just equate to a Money Wallet, and there is much more to be expected from PID. The current Scan to Earn project built around PID is one of them.”

III. PLP: Building Consensus on Fund Flow

PolyFlow’s Payment Liquidity Pool (PLP) separates the fund flow and uses smart contract addresses to receive transaction funds. This enables decentralized fund custody, eliminating the need for expensive enterprise wallets managed by centralized institutions.

The decentralized nature of PLP allows for:

Decentralized Custody: Offering a secure, compliant custodial solution for PayFi applications while minimizing the need for transactional intermediaries.
Liquidity Pools: Aggregating transaction funds via smart contracts, providing liquidity for financing needs within payment transactions.
DeFi Compatibility: While centralized applications cannot integrate with DeFi ecosystems, blockchain-based PLP seamlessly connects with DeFi and introduces DeFi logic into PayFi applications.
RWA Yield: PLP generates yield based on real-world transaction fees, offering DeFi a stable, risk-free source of income.

PLP’s sructure ensures flexibility in integrating with DeFi ecosystems, allowing PayFi applications to adapt to the rapidly evolving digital asset landscape.

However, how should we view PLP’s purpose in consolidating fund flows?

To explain this, Raymond elaborated on three settlement modes within blockchain-based payments to illustrate how PolyFlow addresses this.

Peer-to-Peer Mode

Consider a cross-border remittance scenario — from Address A to Address B. Blockchain-based payments can achieve synchronous confirmation of both information flow and fund flow. The transaction details are reflected on the transparent blockchain ledger, where everyone records and verifies the transaction. The transaction data becomes immutable.

In low-frequency scenarios like this, the synchronization of information flow and fund flow highlights the benefits of blockchain-based payments: near-instant settlement, low transaction costs, a transparent public ledger, and global reach.

However, this on chain peer-to-peer method of synchronizing information and fund flow does not scale up to accommodate the extremely high transaction demands seen in traditional finance, which can easily reach thousands of transactions every second. This can overwhelm and congest blockchain networks very quickly.

In 2023, VISA handled approximately 720 million transactions daily, which equates to around 8,300 transactions per second (TPS) — eight times the capacity of Solana, the highest-performing blockchain. As a result, blockchain-based payments in such high-frequency scenarios would appear inefficient compared to traditional payment methods.

Raymond explained, “The current blockchain and distributed ledger technology cannot handle transaction-by-transaction accounting. In traditional finance, the ledger is only between the two counterparties, but in blockchain networks, every transaction needs to be recorded by the entire network. It’s hard to imagine a scenario where the entire network records thousands of transactions per second.”

So how do we build a new settlement model for blockchain-based payments?

Raymond stated, “Our original answer was to trust in technological progress. With increased computing power, payment efficiency will eventually catch up. But we cannot rely on future technology to solve today’s problems. We need to address the issue by solving it at the core — by building consensus around fund flows.”

Net Settlement Mode

In traditional finance, information flow and fund flow ultimately align, but they are not synchronized. Information flow can be exchanged in real time, but the underlying funds remain in fixed accounts and settle periodically based on pre-agreed cycles. The demand for real-time fund flow interaction is much lower.

Raymond illustrated this with an example of cross-border fund settlement between Bank A in China and Bank B in the U.S. Both banks handle thousands of transactions daily. As mentioned earlier, if these banks were to synchronize information and fund flow for each transaction, no financial infrastructure could meet such a large volume, and it’s unnecessary.

This is where Net Settlement comes in — a settlement method used to handle multiple transactions between counterparties. Each bank exchanges information flow in real time, reconciling their ledgers through net settlement. At the end of the day (assuming daily settlement), after reconciling thousands of transactions, only the net amount is settled.

In practice, if Bank A owes Bank B $20 million after reconciliation, Bank A would transfer this amount, thus settling thousands of transactions in one transfer. If the net amount is zero, no transfer is necessary.

Raymond explained, “In this scenario, the actual movement of underlying funds is minimal. What is happening is the continuous exchange of information flow. This is why, even with the massive scale of traditional financial asset pools, banks do not need extremely advanced systems for processing underlying assets and payment clearing.”

Net settlement can significantly reduce transaction costs, improve efficiency, reduce counterparty risk, and enhance capital utilization.

However, this traditional model requires a centralized trust system. This trust relies on historical credibility, strict auditing, regulatory compliance, collateral support, contractual guarantees, and more. It also comes with the risks of custodianship and lack of transparency.

To replicate this efficient method of net settlement in blockchain while removing the risks posed by third parties, PolyFlow developed PLP to pool funds on a unified blockchain ledger.

The goal is to allow participants, without relying on a trusted third party, to cooperate and verify each transaction’s authenticity, removing the need for custodianship.

In this context, Raymond emphasized the Bitcoin adage: “Don’t trust, verify.” This is the consensus around fund flows on a unified blockchain ledger.

Banks and other financial institutions record transactions via entries on ledgers. As long as the ledgers of Bank A and Bank B are the same, on a unified blockchain, consensus around their fund flows can be achieved. Thus eliminating the need for expensive trust-building mechanisms, and creating a truly Trustless Network.

PayFi Mode

Once consensus is reached around fund flows on the blockchain ledger, we can fully enter the world of PayFi.

Returning to the banking example: once Bank A and Bank B achieve consensus on the blockchain ledger, their basic trust issue is resolved, and they can move from daily net settlement to simply paying each other overnight interest for the use of funds.

This mode further enhances the liquidity of bank funds.

Raymond compared it to the traditional mortgage loan process. When banks grant loans based on mortgage-backed property, the underlying asset (the loaned capital) doesn’t actually move. Borrowers only pay interest because the capital remains within the bank’s ledger.

Now, let’s construct a simplistic Buy Now Pay Never scenario based on PolyFlow: Kevin uses PolyFlow’s decentralized payment gateway to purchase a $5 coffee from a merchant, with both the gateway and merchant funds managed by PLP. Suppose Kevin is also a liquidity provider for PLP, having contributed $50 to the pool, assuming it generates $5.50 in daily returns.

Based on the consensus around PLP’s fund flow, Kevin can purchase the coffee today (without paying), and then use tomorrow’s PLP-generated returns to pay for the coffee, with the extra $0.5 considered Kevin’s overnight borrowing fee.

In this scenario, the value of PayFi becomes apparent:

Cost Reduction and Efficiency: The information flow is exchanged in full, but the fund flow remains static, pooled within PLP.
Improved Capital Efficiency: The static fund flow allows Kevin’s $50 liquidity to be fully utilized.
Innovative Financial Models: Buy Now Pay Never creates an entirely new financial paradigm that traditional finance cannot achieve, driving the mass adoption of PayFi.

In the PayFi mode, capital efficiency reaches a new height. Since all parties’ ledgers are unified on the blockchain, it builds trust and allows real-time verification of transaction details, addressing any funding gaps.

Raymond has studied blockchain technology since 2011: “Terms like the unified, immutable, and transparent blockchain ledger have been talked about for years, but no one has fully understood their true significance until now. The consensus around fund flows on a unified blockchain ledger is what truly matters. It’s what will improve the efficiency of the entire crypto and Web3 space.”

This is the foundation upon which PolyFlow aims to build a decentralized PayFi infrastructure.

IV. PayFi’s Value and Significance

The convergence of blockchain-based payments and DeFi has given rise to PayFi, which is hungry for a new financial infrastructure to support its launch and solve complex compliance issues. Ever since Lily Liu, President of the Solana Foundation, introduced the PayFi concept at the Hong Kong Web3 Carnival, PolyFlow has been recognized as one of the first protocols designed to build PayFi’s financial infrastructure.

Although PayFi sounds no different from GameFi and SocialFi, the key difference of PayFi is to facilitate the tangible application of digital currencies in real-world scenarios.

From a traditional finance viewpoint, PayFi is able to correspond to the migration from Web2 to Web3. For example, how traditional financial payment companies can make use of blockchain technology to gain a larger market share and avoid missing the tides of the times.

In the opposite direction, Web3 groups can use Payment as a carrier to solve the pain points of the traditional financial system by using blockchain technology, and realize a new financial paradigm and product experience that cannot be realized by traditional finance.

When talking about PayFi, Raymond has a deeper understanding: “What PayFi solves is not the problems that blockchain-based payment needs to solve on the surface, such as the challenges of cross-border fund transfer and the lack of financial inclusion, but rather, it needs to solve the most fundamental problem at the moment: effectively separating the information flow of the transaction from the fund flow, so that we can form a unified ledger of the flow of funds on the blockchain. Reach consensus for flow of funds on this unified ledge and enhance the efficiency of the entire Web3 industry, to promote real mass adoption.”

At present, blockchain-based payment is still in the early stages of basic services and a very primitive state. More often than not, digital currencies are taken as the medium of payment transactions to achieve point-to-point mode of settlement, such as OTC, Crypto Payment Card and other scenarios, or through the convenience of digital currencies to achieve cross-border scenarios to achieve the net settlement mode. But relatively speaking, the scenarios are still very limited.

Therefore, the launch of PolyFlow not only enables more PayFi participants to enter the blockchain network more conveniently and realize the construction of real PayFi scenarios of Buy Now Pay Never in our daily consumption scenarios. But more importantly, it enables the formation of a consensus on the flow of funds and enhances the whole blockchain Web3 ecosystem.

V. Lastly

The decentralized ledger concept might not seem revolutionary or attractive at first, but just like the double-entry accounting system and joint-stock companies, it has the potential to change how human society operates.

Blockchain’s natural strength lies in financial infrastructure, and PolyFlow is leveraging the transformative power of digital currency and blockchain to build a decentralized PayFi network. This network aims to lead the shift toward a new financial paradigm and unleash the full potential of Web3.

Ultimately, PolyFlow strives to make the grand vision of Bitcoin whitepaper a reality.

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